A Biotech Garage Sale

Despite producing positive phase 3 data for its cancer compound cabozantinib this year, Exelixis (NAS: EXEL) might be years away from profitability. Medullary thyroid cancer, after all, isn't exactly the largest market, and there are still plenty of clinical trials to be run on cabozantinib in prostate and other cancer types.

So rather than add to the burn rate by bringing another drug into the clinic, Exelixis has out-licensed its preclinical PI3K-delta program, including the most advanced compound, XL499, to Merck (NYS: MRK) . The deal adds $12 million to Exelixis' coffers now, with the potential for an additional $239 million in development and regulatory milestone payments. Exelixis would also be due royalties on drugs from the program. And just to make sure Merck doesn't undercut Exelixis with its own program, there's a clause that allows Exelixis to get milestones and royalties on PI3K-delta inhibitors developed by Merck.

XL499 trails Gilead Sciences' (NAS: GILD) GS-1101 -- aka CAL-101 before Gilead renamed it -- which the company got in the purchase of Calistoga this year. Gilead's PI3K-delta compound looks good in both non-Hodgkin's lymphoma and chronic lymphocytic leukemia, although the data to date has been on just a few patients. Infinity Pharmaceuticals (NAS: INFI) has a PI3K-delta inhibitor called IPI-145 that's also in the clinic.

The space may be getting crowded, but there appears to be plenty of patients to treat. In addition to blood cancers, PI3K delta inhibitors might also be used to treat inflammatory diseases. While it might seem weird that a drug would treat cancer and something like rheumatoid arthritis, it makes sense because the goal of both treatments is to dial back the immune system. That strategy has already proved to work for inhibitors of other immune-cell proteins. Roche and Biogen Idec's (NAS: BIIB) Rituxan is approved for NHL and CLL, as well as rheumatoid arthritis. And Sanofi (NYS: SNY) is trying to get its CLL treatment Campath approved to treat multiple sclerosis.

Giving up most of the rights to XL499 and the rest of the program will look like a bad move if one of the drugs turns out to be a blockbuster, but given Exelixis' current state, there doesn't seem to be much other choice. Surviving to see your first blockbuster should be goal No. 1.

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